How To Trade This Event Risk

Business confidence in Germany is anticipated to fall to 94.3 from 94.8 in August as Europe’s largest economy is on the brink of a recession. The economy contracted in the second quarter for the first time in nearly four years due to a slump in business investments, and conditions may only get worse as firms continue to face higher input prices amid slowing demands. In July, retail spending fell 1.5%, which was much greater than the 0.3% decline expected by economists. Furthermore, consumer confidence fell to a record low reading of 1.5 in September, which suggests that domestic demands may weaken further as consumers face higher living costs. Meanwhile, manufacturing activity contracted for the second consecutive month to reach a record low reading of 48.1 from 49.7 in August, whereas German service contracted for the first time in seven months. The downturn in the economy suggest that economic activity throughout the Euro-Zone may remain subdued throughout the rest of the year, which could lead the ECB to lower the benchmark interest ahead of schedule. Growth concerns have clearly weighed on interest rate expectations as overnight index swaps show that market participants have already raised bets that the ECB will reduce the benchmark interest rate at least once over the next 12 months.

However, with oil and producer prices pulling back from their record highs, an unexpected improvement could fuel bullish sentiment for the euro. Therefore, a rebound in business confidence paired with an improved outlook would favor a long euro position. We will look for a green, five-minute candle following the release to confirm an entry on two lots of the EUR/USD, and will setup a stop below the nearby swing low (or reasonable distance). Our target for the first lot will be equal to the initial risk, while our second target will be based purely on discretion. To preserve our profits, we will move the stop on the second lot to breakeven once the first lot reaches its target.

However, fading demands paired with recessionary concerns could weigh further on businesses, and may lead firms to hold a dour outlook going forward. A fall in business confidence would trigger a short trade for the EUR/USD, and we will then look for a red, five-minute candle following the release to confirm an entry, and will follow the same setup as mention above, just in reverse.

Jamie Saettele is a Technical Currency Analyst for FXCM.